SE insurance S-corp employee

[grandmabee]

taxpayer is the 100 % shareholder in S-corp. the S-corp pays the health insurance and it is on the W-2.

wife has a small Sch C with net about 1200. I used the SE health insurance deduction on pg 1 of 1040. I did not reduce the SE schedule because it was for S-corp and not Sch C. But now we get a letter and they wipe the SE tax. It made a difference of about 168. in tax. Which is right? if insurance is for S-corp then can I still use it for the Sch C?

Thanks

[mcb39]

taxpayer is the 100 % shareholder in S-corp. the S-corp pays the health insurance and it is on the W-2.

wife has a small Sch C with net about 1200. I used the SE health insurance deduction on pg 1 of 1040. I did not reduce the SE schedule because it was for S-corp and not Sch C. But now we get a letter and they wipe the SE tax. It made a difference of about 168. in tax. Which is right? if insurance is for S-corp then can I still use it for the Sch C?

Thanks

Isn't the husband technically an employee of the S-Corp and therefore ineligible for the SE Insurance deduction?

[JohnH]

I think you handled it correctly, but IRS computers for some reason are not set up to handle this situation. They are looking to make a S/E tax adjustment any time there's an entry on Line 29 of the 1040 when a Schedule C is also attached. I'd tell the client to cash the check, and at the same time send IRS a letter explaining the Line 29 entry, with a copy of the W-2, highlighting the entry in Box 12a of the W-2. Then wait and see if they send a bill for the $168. If they never respond, I'd forget about it. I think it's quite likely that nothing will ever come of it.

[Gail in Virginia]

Marilyn, S corporations are a funny animal. Normal employees can exclude their health insurance from their income and social security taxes before they receive their pay - the corporation either pays it for them or they pay it pre-tax. However, an S-corp owner who owns more than 2% of the corporation must add the amount of health insurance premiums back to his or her taxable income on his or her W-2. Therefore, they are allowed to deduct it on page one of the tax return.